Originally published by AxiTrader
Market Summary
A new record high for the Dow but the Nasdaq and S&P 500 dipped a little as traders absorbed more earnings. European stocks were also lower. But SPI traders have marked prices higher by 24 points as they bet that the S&P/ASX 200 will have a better day of it today.
Perhaps that’s because oil and gold both rallied Friday night. But so too did the Australian dollar which is back near 80 cents this morning. So we’ll see.
And speaking of forex the US dollar was hammered again Friday even though Q2 GDP printed a not shabby 2.6%. But the data lacked the oomph to turn what appears to be incredibly bearish sentiment toward the big dollar at the moment. So euro is back near 1.1750, the pound is back above 1.31 and the Canadian dollar is back near its highs.
On commodity markets oil traders are gaining confidence that OPEC might be right, copper is focused on its own market tightness and gold is benefiting from a weak US dollar.
The week ahead offers plenty of catalysts for trade. Most of those kick off tomorrow however.
Here's What I Picked Up (with a little more detail and a few charts)
International
- US Q2 GDP increased at a 2.6% annualised pace the advance read released Friday showed. That was in line with expectations, but growth in Q1 was downgraded to 1.2%. That growth showed a boost from consumption and business spending was a good sign for the outlook. But the bears decided to focus instead on the lack of wage price pressure means that the Fed has plenty of time in which to raise rates. But we know that don’t we? The Fed essentially told us that after last week’s FOMC meeting.
- But the 1.9% pace of H1 growth is much slower than many traders and investors likely expected six month or so ago. The Fed too will be disappointed given the slowdown doesn’t yet appear to be as transitory as they asserted a few months back. Indeed the Citibank Economic surprise index for the US is still deeply in negative territory at -44.5. That means the data is still printing much weaker than forecast.
- Also out Friday in the US was the final read for the University of Michigan consumer confidence data which missed expectations with a print of 93.4. Current conditions were a little better though at 113.4.
- The wash up was that bond rates eased a little with US 10’s closing the week at 2.29% while the 2-year rate finished at 1.35%.
- In Europe French inflation data remains below 1% while the German print of 1.7% won’t worry the ECB too much.
- President Trump had quite a bit to say on Twitter over the weekend. He took aim at the Chinese after another North Korean missile test showed Pyongyang is continuing to improve its technology. He wanted to tell the world again that he and he alone was responsible for his election victory. And he told republican Senators to get back to it and repeal Obamacare.
- It is this last focus, where the President said lawmakers should not vote on any other bills until health care is done, which goes to traders – at least in forex markets – focus on the stalling of the Trump agenda. Much of the money for tax cuts – assuming the desire to be revenue neutral and thus avoid a Filibuster – was coming from care reform. So like old mother Hubbard the President’s cupboard is bare unless or until he changes his style or health care is reformed. Neither seems likely anytime soon. It’s a big part of what ails the US dollar.
- Geopolitics is at it again as a potential driver of markets. The US and Russia are in a diplomatic spat after Congress appears to have snookered President Trump into signing the new sanctions on Russia.
Australia
- The short term punters really have the tiger by the tail on the local stock market right now. Sure we saw some selling across Asia on Friday, and certainly European stocks opened lower and closed in the red. But the 82 point drubbing the S&P/ASX 200 took Friday came pretty much out of nowhere with broad based selling.
- Sure the concerns about companies exposed to the higher Aussie make sense, but overall the volatility we saw last week – which included two big falls and two decent rallies – is likely pushing real money to the sidelines and leaving it to the short terms traders to punt away.
- As you can see in the chart below however, we are moving toward the pointy part of the wedge the S&P/ASX 200 has been trading in since June. We had two false breaks last week intraday, but the integrity of the wedge has been preserved on a daily close basis. Only a close outside this wedge would get me excited that we might be about to see a change in trend.
- On the day SPI traders reckon that prices will rise having marked futures 24 points higher in trade on Friday night. Oil and gold did better in trade but only 241 stocks on the S&P 500 were higher and the index closing lower could be a headwind to this 24 point gain today.
- Naturally earnings season is going to be important on that front. I’m a macro guy so I’ll leave the predictions and the analysis to others. But the index is built on the hard work of the individual companies so these results will be very important – individually in some cases for the very large index weights – and in aggregate for the overall outlook for local stocks.
- So too will the economic data, the Aussie dollar and RBA outlook. And on that front we have a huge week with the RBA board meeting, interest rate decision, and governor’s statement the highlight tomorrow before the release of the quarterly Statement on Monetary Policy is out Friday. Please see the Forex section for my thoughts on this.
- Friday’s retail sales data is the other highlight on what is a pretty important week of data.
Forex
- The US dollar can’t take a trick at the moment. Friday’s Q2 GDP print wasn’t terrible by any stretch of the imagination. But the US dollar pretty much reversed all of the gains it made the day before. The price action reminds me of that which occurred in the Euro soon after its float as it headed lower to an eventual record low around 0.82/83 against the US dollar.
- What was clear then for the euro, and seems to be happening now for the US dollar, is that sentiment has turned so sour that traders and investors are going out of their way to accentuate the negatives, and dismissing the positives, in the data and news.
- That’s important for my assertion that the US dollar might find some support because much, if not all, the bad news about the US economy, the Fed, and this flailing Trump presidency was already factored into the price of the US dollar – in US Dollar Index terms, against the euro, and in other pairs. I could be utterly wrong on that if folks are only focussed on bad news for the US and good news for everywhere else. That would suggest an environment where the US dollar has few friends.
- That’s the rhetorical view anyway. In terms of price action that has coalesced into my system having triggered me long Aussie and Canadian dollars against the US dollar after Thursday/Friday trade. The usual stop losses are in place and I have faith in my system overall, but as you can see in the USD/CAD on Friday we saw a very sharp reversal for the dollar. At 1.2436 this morning USD/CAD is back near the lows.
- Likewise, other pairs are back near their highs against the US dollar. The euro is at 1.1745, just below last week’s peak and back at the top of the current uptrend. The pound has climbed back above 1.31 and is at 1.3122, while USD/JPY is back down at 110.62. The Swissie’s divergence continues however with USD/CHF at 0.9686.
- The Aussie is lagging a little only sitting at 0.7983 this morning. No doubt that is a little bit of cautiousness as traders await the RBA decision tomorrow, governors statement, and then Friday’s quarterly Statement on Monetary Policy. No one really expects the RBA to move rates. But it is fair to expect – especially after Friday’s weakness in the US dollar – that governor Lowe will harden up his language around the impact of a higher Australian dollar on the economy in the year, years, ahead.
- Perhaps something like “the rally in the exchange rate is complicating the economic adjustment and if sustained will negatively impact on growth in the year ahead”. I’d expect a broader discussion of the impact of the higher Aussie – in TWI as well as USD terms - in the SoMP Friday. Should governor Lowe pass on this opportunity to jawbone the Aussie expect it to roar back to and through last week’s highs around 81.50 cents against the US dollar.
Commodities
- Oil finished off the week strongly again as the inventory draw, refinery production, and Saudi decision to restrict exports coalesced into the type of positive narrative oil bulls have been looking for. WTI finished the week at $49.71. That’s up $4.34, 9.5%, from Monday’s low. Brent crude also had a strong week closing at $52.52.
- Naturally the he result of this rally has been a lift in net long positions from the speculative community CFTC data released Friday showed. This is an important driver, and a clear sign it is sentiment of the speculators that is the primary driver of oil prices – you can see the strength of the correlation in this chart of the movement in net speculative positions and the price of WTI.
- What that means to me is this reinforces my oft cited view that inventories are the only unbiased, empirical method, by which traders can assess the efficacy of the OPEC/non-OPEC production deal. Throw in the Saudi announcement last week to again drop exports, plus the recent slowdown in the pace of rig expansion in the US (only 2 added last week) and it’s clear that traders are watching and listening.
- Gold is up at resistance this morning trading at $1268. Given the US dollar was weak again on Friday night – despite the solid GDP print – and given the pressure to raise rates seems to have waned it makes sense gold is on the up. But as always I respect the trendline. Here’s the chart:
- Copper held onto gains to end a stellar week’s surge after an early bout of weakness Friday. At $2.87 a pounf copper is up 15 cents, 6%, from Monday’s low. Coppers rally is a combination of concerns about tightness in the market, a more positive outlook for Chinese and global growth, and concerns about China restricting scrap imports.
- In pure price terms copper has had a massive breakout, both on the dailies and weeklies. No doubt some part of this is also US dollar weakness, but overall the bulls are lifting their heads and targets of the 2015 high at $2.97 or Fibo projections at $3.10 are now a chance.
Have a great day's trading.